Thursday, August 29, 2013

Statute of Limitations for Tax Refunds, IRS Audits, and Collections


The IRS has three years to give you a refund, three years to audit your tax return, and ten years to collect any tax due. Together, these laws are called the statute of limitations. They put time limits on various tax-related actions that you and the IRS can take. 

You have 3 years to claim a tax refund.

This is measured from the original deadline of the tax return, plus three years. For example, your 2010 tax return is due on April 15th, 2011. Add three years to this filing deadline, and you have until April 15th, 2014, to file your 2010 tax return and still get a tax refund. If you file your 2010 return after April 15th, 2014, then your refund "expires." It goes away forever because the statute of limitations for claiming a refund has closed. If you already filed a tax return, you can claim any additional refunds by sending in corrections with an amended return. Amended returns claiming additional refunds must be filed with the IRS before the statute of the limitations expires three years from the original April 15th due date.
Filing an extension may extend the period for claiming refunds. Under code section 6511(b)(2)(A), the IRS can issue refunds for a particular year if you requested an extension and subsequently file a tax return within three years from the extended deadline.

The IRS has 3 years to audit your tax return or to assess any additional tax liabilities.

This is measured from the day you actually filed your tax return. If you filed your taxes before the deadline, the time is measured from the April 15th deadline. We could utilize the same example as in the refund situation: the IRS has until April 15, 2014, to audit a 2010 tax return filed on or before April 15, 2011. After the three-year audit time period has expired, the IRS cannot initiate an audit of your tax return unless there is a suspicion of tax fraud. Most state tax agencies follow the federal three-year period for auditing tax returns; however some states have a longer statute of limitations.

The IRS has 10 years to collect outstanding tax liabilities.

This is measured from the day a tax liability has been finalized. A tax liability can be finalized in a number of ways. It could be a balance due on a tax return, an assessment from an audit, or a proposed assessment that has become final. From that day, the IRS has ten years to collect the full amount, plus any penalties and interest. If the IRS doesn't collect the full amount in the 10-year period, then the remaining balance on the account disappears forever because the statute of limitations on collecting the tax has expired.

Example of the Refund Statute of Limitations Works in Real Life

Let's provide an example of how time limits effect federal tax refunds are based on a real-life scenario. Mr. Smith wants to file 6 years of tax returns: 2004 through 2010. In all those years he has refunds. If he files by April 15th, 2011, Mr. Smith will receive refunds for the years 2007 through 2010 as those years are still open under the 3-year time limit. Refunds from earlier years 2004, 2005, and 2006, however, have expired and the IRS won't send him a refund check. When a refund has expired, that refund money disappears forever. In IRS terminology, an expired refund is considered an "excess collection". That refund money cannot be sent to the taxpayer as a check. Nor can the refund money be applied as a payment towards another tax year for which a person might still owe the government. Nor can be refund be applied to another year as an estimated payment.

Using Time Limits to Plan Your Taxes

It is in your best interest to file your tax returns at your earliest possible convenience. First, you can claim refunds. Second, it starts the clock ticking on the 3-year statute for audits and the 10-year statue for collections. There's some unique planning opportunities as well if there are multiple tax years involved, as refunds that are still allowed under the 3-year time limit can be utilized to pay off other tax debts owed to the IRS or applied to your current year's estimated taxes.

Tax Law References

For more information on how the IRS manages these statute of limitations, see Internal Revenue Manual, 25.6.1, Statute of Limitations.

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